Ecuador, Cyprus bond sales should set off alarm bells

Not so long ago, Cyprus faced social unrest over its economic troubles.AFP--Getty Images

They say that “nobody rings a bell at the top of the market,” but at least some people will be hearing alarms going off in their head after the last 24 hours, which have seen Ecuador and Cyprus sell over $3 billion in new bonds to investors desperate for yield.

Ecuador sold $2 billion in 10-year debt at a yield of 7.95% in its first public debt sale since defaulting on $3.2 billion of debt in 2008, while Cyprus sold €750 million ($1.01 billion) of five-year notes at 4.85%, just 15 months after it went cap in hand to the euro zone and International Monetary Fund for a €10 billion bailout.

And it’s not like that is out of line with recent developments. Greece, the world’s most famous basket case of the last decade, managed to sell €3 billion of new bonds at under 5% two months ago. And as of today, it costs Spain, with its 53% youth unemployment rate, its crippled banks and its unending vistas of vacant or half-built real estate, only 0.06% more than it costs the U.S. to borrow for 10 years.

For Cyprus, there’s some method to what looks, from a halfway decent distance, like madness. In contrast to Greece and the rest of the euro-zone bailout cases, Cyprus’ economy shrunk by much less than the creditors expected when they put the bailout package together — a mere 5.4% last year. Standard & Poor’s upgraded its credit rating to B from B-, with a positive outlook, in April, while Fitch Ratings Agency raised its outlook to stable from negative. Both now see Cyprus’ borrowing needs falling faster than originally thought.

And it’s difficult to argue that 4.85% from Cyprus, which is at least being forced into reforming, isn’t a better bet than 1.54% from Italy, which has a much higher debt burden and still hasn’t proved that it has the ability to drag its over-regulated, under-capitalized economy into the 21st century.

Most of all, the European Central Bank’s guarantee to keep interest rates near zero for as far as the eye can see is fuelling a rally in all euro-zone debt, good and bad.

He’s less optimistic about the Ecuador issue though. Ecuador had defaulted in 2008 when it could have paid, and the left-wing government of President Rafael Correa has hardly changed its spots since then. Correa, it will be remembered, is the man who thought the rest of the world should pay Ecuador for NOT developing oilfields in the Amazon basin, for environmental reasons–then accused it of being hypocritical when it declined to take him up on the offer.

“Their track record is one of serial default,” said Culverhouse. “Eight percent is beginning to look interesting, but I’m surprised it wasn’t higher.”